The British Pound Falls to Lowest Level Against Dollar Since 1985

The British pound has plummeted to its lowest level against the U.S. dollar in almost three decades. Wednesday, the pound fell to $1.1475 per dollar, the lowest level since 1985. The plunge is due to fears of a looming recession, double-digit inflation, and public spending cuts. The Bank of England has warned that there is little the central bank can do to avert a recession this year. It predicts that the economy will contract in 2022 and remain weak until 2023.

The fall in sterling’s value reflects the views of traders about the health of the economy. Many factors are weighing heavily on the UK economy, including soaring energy costs. The pound’s drop in value against the dollar also reflects the relative strength of the American economy. Despite recent easing of inflation, the Bank of England has warned that the economy could suffer a recession over the next two years.

The pound’s fall has been largely due to the deteriorating economic climate and the election of Liz Truss as prime minister. The pound has fallen over 15% this year, and investors are increasingly worried about the UK’s economic health. The new government will be tasked with tackling the rising costs of living and reducing taxes.

The weakening pound is expected to persist, but the Bank of England is expected to hike interest rates to counter inflation. While the Bank of England has a long history of lowering interest rates, the weak pound will make policymakers worry about increasing prices. Further, sterling’s weaker performance will drive inflation higher as import prices rise.

A renewed fear of global recession has knocked sterling, and weak economic data in the UK has added to the pound’s woes. On Friday, the risk-sensitive currency fell below $1.20 against the dollar, and it ended the day 0.66% lower at $1.2094. The British currency also suffered against the weakening euro. Its half-year decline against the euro is the largest since 2020.

The sterling’s decline is a side effect of America’s relentless dollar rally. Since the euro arrived in 2001, the dollar’s share of the global reserve currency has fallen from 71.5% to around 66.8%, or more than a dozen percentage points. This is not a long-term trend, though: in July, the share of the euro in the global reserve currency market jumped from 5.7% to 6.0% – a record high for the U.S. dollar! In the last month, however, the euro has declined from a seven-year low, and the pound has remained roughly stable since then.

The pound fell against the dollar on Friday but rebounded in early morning trade on Monday. The decline was hampered by thin holiday trade on Friday. The Federal Reserve has indicated that it will raise interest rates, albeit in unspecified increments, if the market’s concerns are legitimate. Meanwhile, the Euro to Dollar rate reversed half of its decline last month, suggesting a market inflection point is imminent and could benefit a range of currencies.

Generally, the US dollar’s rise is a positive thing for the US economy. It supports robust consumer demand, while containing inflation. It’s also good for corporate earnings. It eases the impact of global trade and makes it cheaper for companies to buy goods overseas.

In April, the U.S. dollar’s value against the six major currencies rose against other currencies. The reason for this is that the Fed has signaled reticence to raise rates in the near term, citing uneven economic data. However, despite this, they are expected to hike interest rates by at least 25 basis points this year.

RBC Wealth Management U.S. is a registered broker-dealer in the U.S., and is part of RBC Capital Markets, LLC. The firm has offices in Hong Kong, Toronto, and Hong Kong. Its foreign affiliates include RBC Dominion Securities Inc.